Abstract

Is stock market volatility an important determinant of money demand in the UK? If yes, what is the driving force behind that effect? In a cointegration framework, we find that volatility in share prices is an important positive
determinant of money demand, alongside standard variables and the stock price level. By studying different stock market indexes effects, we find that the risk aversion of investors is an important force behind the effect, implying that the effect is due to investors’ flight to safer assets in times of volatile stock prices.